Could a social impact bond work to fund SA's Covid-19 interventions?

Health workers screening people. (Getty)
Health workers screening people. (Getty)

National Treasury has not ruled out a proposal of a social impact bond to help finance Covid-19 interventions, said Director General Dondo Mogajane.

During a virtual discussion event hosted by 100% black-owned event and media company Empowaworx on Friday, Mogajane weighed in on the impact of Covid-19 on the economy and potential sources of funding for interventions, which could include social impact bonds.

Government has launched a set of interventions to manage the crisis, such as procuring personal protective equipment for healthcare workers and instituting a national lockdown to slow the spread of the virus, which has also brought most economic activity to a halt, and all this has come at a cost.

Treasury has put together a R500 billion stimulus package to support distressed businesses which have had to close, and to support other vulnerable groups in society with grants. But Mogajane highlighted that the stimulus package has its limitations.

"The R500 billion by any margin is not enough. We think the impact is going to be huge; lost jobs, loss of income and closure of businesses. Small businesses are going to be highly impacted," he said.

Treasury projects an under collection of tax revenue between R250 billion and R300 billion. More detail on this is expected to be provided when the adjusted budget is tabled. Less revenue would limit government's available resources to address needs. 

The economic situation has also been exacerbated by a downgrade into junk status by ratings agency Moody's, Mogajane added. This makes borrowing expensive for government, he explained.

Government intends to partly fund the stimulus package with borrowings of R100 billion from multilateral institutions such as the New Development Bank and the International Monetary Fund.

A Solidarity Fund has also been established to assist the vulnerable in society, with a donations target of R4 billion. Those who have donated include members of the Oppenheimer family and numerous companies.

The Reserve Bank has also stepped in with some interventions to ensure the smooth functioning of markets, such as purchasing government bonds and reducing interest rates that would provide relief to indebted consumers. The combined fiscal and monetary policy interventions is valued at more than R800 billion.

Responding to a question from Fin24 on whether government would consider a social impact bond to help plug its Covid-19 funding gap, Mogajane said that Treasury was open to proposals. "We are not ruling anything out in this point in time, in terms of debt," he said. There are also calls for a solidarity bond where South Africans and people globally can buy to support interventions to help efforts to address socio-economic challenges in SA, he said.

"We have not, as yet, fully looked at the implications of what that (social impact bonds and solidarity bonds) would be," he said. Mogajane encouraged more proposals to come forward.

Market research firm Intellidex, has proposed a social bond as an option for additional funding. Head of capital markets research at Intellidex, Peter Attard Montalto this week released a paper on the proposed social bond, which he said has been discussed with Treasury, the Presidency and other government officials in the past two months. He said that as much as R100 billion could be raised through the social bond.

Social bonds have been used as financing instruments for social projects. While government could use its existing government bond programme to fund Covid-19, there is also an opportunity for it to tap into a growing trend of impact investing – these are investments which respond to environmental, and socio-economic issues, according to the Intellidex paper. These investors seek social returns, in addition to financial returns. The social bond would have a social return – spending on healthcare and economic support related to the Covid-19 crisis.

"Such a tool could be important, not just right now, but further into the future if the Covid-19 crisis goes through several waves in the coming years," Montalto said. "The Covid-19 crisis is clearly an issue that raises profound sustainability and social issues. It represents the greatest threat in a generation to the sustainability of lives and the economic order," he added.

So far Guatemala has issued a social bond to fund its response to the Covid-19 outbreak, and raised $1.2 billion, Montalto pointed out.

Montalto explained that a social impact bond is different in that people get paid for specific outcomes. "Social impact bonds provide a return to investors only if the social objectives are achieved and in this, they are distinct from social bonds which provide a return agreed upfront either way."

There are examples of social impact bonds being issued in SA before, such as an early childhood development programme in the Western Cape in 2016. Green bonds have been issued by the City of Cape Town and the City of Johannesburg to fund green projects such as the water crisis and dual fuel buses, respectively.

In a paper about social impact bonds authored by independent economist, and member of the president's economic advisory council Thabi Leoka, she explained that government would reimburse investors based on the terms of the agreement of the bond. For example, if the project is not successful in that it does not achieve social objectives, investors would likely not generate any returns. But a government guaranteed bond, means that government would have to reimburse investors if social objectives are not met.

"The success of the project, means government does not have to get involved financially. But if the project is not successful, and because it is guaranteed by the state, the state will have to pay," she explained.

Leoka said that SA is already fiscally constrained, and government probably would not want to extend its contingent liabilities, given that it has already guaranteed the debt of troubled state-owned enterprises. But, government is also unlikely to guarantee a project it thinks might fail, she added. 

Leoka is also not sure if it would be best to have a social impact bond that applies countrywide, but rather to specific regions. In her research, Leoka has found that social impact bonds have been applied for specific programmes. In the UK a social impact bond was launched in 2010 to fund a rehabilitation programme for prisoners at Peterborough Prison. In Salt Lake City, in the US, social impact bonds have also been used to fund programmes that support early childhood development, similarly the bond was used for a programme for the homeless in Massachussetts. "A lot of it is very community based," she said.

Montalto does not rule out the idea of an NGO arranging a social impact bond for Covid-19. "There could be some options like this including the Solidarity Fund could even borrow money on this basis with a National Treasury guarantee potentially."

He also brushed off the risk of a call on government guarantees in the case of a project failure. "As we've seen with Land Bank and others, guarantees etc. in reality are meaningless versus National Treasury's views on what needs to be saved, [and] when." The Land Bank recently announced that Treasury, its shareholder, would guarantee a R3 billion loan to support it - this after it defaulted last month, Fin24 previously reported.

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